Katalatto Guests: The role of Property Rights in Entrepreneurship

Katalatto Guests: The role of Property Rights in Entrepreneurship

“Without an integrated formal property system, a modern market economy is inconceivable. Had the advanced nations of the West not integrated all representations into one standardized property system and made it accessible to all, they could not have specialized and divided labor to create the expanded market network and capital that have produced their present wealth. The inefficiencies of non-Western markets have a lot to do with the fragmentation of their property arrangements and the unavailability of standard representations.” says Hernando de Soto on his book called “The mystery of the Capital”.

Property rights can be divided into rights of disposal and into intellectual property rights (IPs).

Most people own property. And then you can do whatever you want with your property. It does not make a difference whether your property is intellectual or not. From an entrepreneurial point of view, rights of disposal control your scope of action and your incentives (including your scope of action regarding IPs). If you have full rights, you can choose between your commodities. The more likely it is that you implement your choice in your scope of action, the stronger your rights of disposal are and thus the stronger you will constrain other market participants who acknowledge your rights of disposal. By this, your scope of action will gain legitimization and thus your rights of disposal will gain strength.

If you can enforce your choice in your scope of actions without any problems, you have exclusive rights of disposal. This is, for example, the case when you have full legal rights for your assets/commodities or your IP.

This economic definition of rights of disposal contains laws (IP law, antitrust law, etc.) as well as informal norms (social control, specific conventions, etc.). Other group and market participants will base their actions on these informal norms as they expect that the other participants will base their actions on these informal norms as well. This is called reciprocity.

To put rights of disposal in a nutshell you can say that you can do whatever you want to do with assets if you are the owner and have full rights of disposal. Then you can strengthen your scope of action’s legitimization as long as you do not break the law. Whereas you will reduce your legitimization if you do not base your actions on informal norms. So, one can say that rights of disposal grant freedom, autonomy, and self-responsibility as well as moral commitment. But this is liberalism.

What are the IPs?

Intellectual property is the property of immeasurable value. Nevertheless, IPs are essential for the company assets since exclusive rights of disposal depend on your IPs. This correlation results in intangible assets. The intellectual property falls into four sub-categories:

If you are an entrepreneur, you will need to keep in mind not to make unauthorized use of other people’s IPs. Otherwise, you could break the law and could be punished by the judiciary. Additionally, and yet not surprisingly there are laws in many countries which control the market. For example, your actions must not harm other’s competitiveness (only if you were aimed at doing so). If you know that your implementations of your choice in your scope of actions will harm others competitiveness there are two established ways to circumvent the competitive order’s regulations:

1) There is the “Liability Rule”. You can harm in a legal way other IP-rights and rights of disposal when you offset the attributable damage.

2) There is the “Property Rule”. You must elucidate the presumable damage to possible “victims” and they have to agree to your actions but will probably demand a much higher compensation than in

1). That is the reason why the “Property Rule” is restricting innovation and the “Liability Rule” is supporting innovation. Furthermore, you need to know that most likely the federal proviso on building permission can suppress your private rights of disposal and thus the state can intervene in the “free” market. By these interventions (precepts/restraints) some entrepreneur’s rights of disposal lose party loses their value and as a result, any gains in efficiency are reduced.

Personal conclusion:

To summarize the influence of property rights on entrepreneurial activities one can say that property rights can be divided into rights of disposal (controlling your scope of action / your allowance to implement changes in your business) and IPs (controlling which ideas you can use / on which ideas you can ensure legal protection).

If you are an entrepreneur and you want to implement changes in your business which may affect other market participants, you either shouldn’t harm their competitiveness or chose either the “Liability Rule” or the “Property Rule” to compensate any damage (depending on which one is legal and established).

But, are property rights economically reasonable for you as an entrepreneur? Because, on the one hand, property rights restrict you as you are not allowed to use other’s property and you mustn’t harm other’s competitiveness. Besides, on the other hand, property rights also restrict other market participants and thus secure your property (IPs as well) and as a result, property rights secure everyone’s intangible assets, your company’s value and your scope of action’s legitimization.

Furthermore, property rights establish freedom, autonomy, and self-responsibility (as mentioned earlier). But this can only be guaranteed if the federal proviso on building permission is used as seldom as possible since governmental regulatory interventions can restrict our freedom and our autonomy. So, all in all, one can say that property rights have a few downsides but a lot of advantages for you and your company. They grant freedom and protect your company. And because any transaction and any new implementation in your company have got something to do with property rights one can say that the rule of property rights in entrepreneurial activities is enormous.